BATS rolls out free "kill switch" and other trading risk controls

NEW YORK – BATS Global Markets, the No 3 U.S. equities exchange, said on Monday it will begin offering free risk management tools, including "kill switches" and order restrictions, to all of its members to help limit trading errors and improve investor confidence.

Risk controls have been a major focus for the securities industry following high-profile electronic snafus like the August 1 glitch at Knight Capital Group that unleashed a flood of errant orders to the New York Stock Exchange and nearly bankrupted the firm. Knight is one of the biggest executors of U.S. trades.

BATS' customizable controls allow its member firms to set order restrictions, maximum per-order limits, and order cutoffs, that could help limit the damage when a glitch occurs, said Chris Isaacson, BATS' chief operating officer.

"If Knight had put in an aggregated credit limit based on gross or net for their orders over those ports, then they would have potentially tripped those limits," he said, adding that the controls are specific to BATS' exchanges.

BATS will also provide a member-controlled "kill switch," which would cancel all open orders and block new orders, either by pushing a button, or through an automated function.

The U.S. Securities and Exchange Commission convened an industry roundtable in early October which focused heavily on the idea of a kill switch to contain high-speed trading errors to give investors peace of mind.

The regulator also launched a broad review into technology issues at major brokerage firms, many of which feature computer-generated, or algorithmic, trading at lightning-fast speeds.

A key aspect of BATS' suite of risk management tools is that it will not slow down those speeds, or add latency, as the controls are embedded within BATS' system, said Isaacson.

"Whenever orders go through our system, they go through these controls regardless of whether you are sponsored or not. So when we say it is no latency, it really is with no latency added," he said.

BATS had its own glitch earlier this year during its attempt at an initial public offering. The exchange quickly pulled the plug on the IPO and was lauded by many in the industry for how it handled the situation. The second major glitch of the year plagued Nasdaq OMX Group during Facebook's market debut.

Isaacson said BATS is still involved in working with other exchanges, brokerage firms, and regulators, on industry-wide risk management controls.

"I think some standardization around these controls is really the goal of the whole industry effort, and we are just trying to make sure that the controls we have are as available as possible," Isaacson said.